The big picture
The latest Global Risks report published by the World Economic Forum is an excellent resource for boards prepared to think more widely about the global trends shaping the future of businesses around the world
Since the global financial crisis, companies have become much more focused on the need for effective risk management and this increased attention has resulted in more sophisticated metrics for the assessment and mitigation of risk. These metrics work reasonably well where companies are considering the most common risk scenarios, such as compliance risk or cyber security, but they are less suited to a consideration of the strategic risks businesses face as a result of macro-level and long-term global trends.
The reason for this is fairly obvious. In today’s complex and fast-changing global environment it is difficult to predict which trends may become a real threat and global risks are largely beyond any individual company’s control or influence. This does not mean, of course, that they can be safely ignored. In some sectors, notably the energy sector, the need to address the big picture – issues such as geopolitical instability, climate change, terrorism, etc – has been recognised for some time. But more recently there has been a growing perception that many global trends pose considerable long-term uncertainty that will ultimately require a response from every business. However, getting such trends onto board agendas may be a daunting prospect for company secretaries and board chairmen. Which trends should be considered relevant and how far into the future should the board set its planning horizon?
The Global Risks report
For the past eight years, the World Economic Forum has been publishing its Global Risks report which analyses the perceived impact and likelihood of 50 prevalent global risks over a 10-year time horizon. The latest report (Global Risks 2013, see www.weforum.org/ globalrisks2013 for more information) is based on the Global Risks Perception Survey conducted by World Economic Forum in September 2012. Over 1,000 respondents, comprising top experts and high-level leaders from business, academia, NGOs, international organisations, the public sector and civil society, evaluated 50 global risks in five categories – economic, environmental, geopolitical, societal and technological. For each global risk, respondents were asked to rate on a scale from 1 to 5 both how likely was it that the risk would occur over the next 10 years and how much impact the risk would have if it were to occur.
The report is a highly useful resource for boards eager to expand the scope of their strategic planning since gives an annual league table of the major threats currently at the top of the political and business agenda. This year’s report finds that the top five risks by likelihood are:
- severe income disparity
- chronic fiscal imbalances
- rising greenhouse gas emissions
- water supply crises, and
- mismanagement of population ageing.
While the top five risks by impact are:
- major systemic financial failure
- water supply crises
- chronic fiscal imbalances
- food shortage crises, and
- diffusion of weapons of mass destruction.
The report points out that the 50 global risks covered by the survey are interdependent. This makes strategic risk management much more difficult and increases the potential damage of any one risk factor. The report warns, for example, of the dangers of multiple systems failing. The world is still reeling, of course, from the effects of the global financial crisis and a major economic crisis happening in tandem with a major environmental crisis would clearly be catastrophic. ‘The narrative emerging from the survey is clear: like a super storm, two major systems are on a collision course. The resulting interplay between stresses on the economic and environmental systems will present unprecedented challenges to global and national resilience,’ the report says.
In an article on the Project Syndicate website, Lee Howell, Managing Director of the World Economic Forum’s Risk Response Network which produced the report, commented that facing stresses on both the economic and environmental systems simultaneously would be ‘like losing both engines on an airplane in mid-flight’.
Many of the threats discussed by Global Risks report will already be on the radars of most businesses and some are unlikely to ever make it as far as a board agenda – the discovery of alien life, damage to space-based infrastructure and the dangers of geomagnetic storms, for example. In between these poles there are many scenarios which deserve attention. For example, in its discussion of technological risks the report highlights the risk of ‘digital wildfires’. Social media increasingly allows information to rapidly spread around the world and while the benefits of this are obvious, the report points out that this connectivity could also enable the rapid viral spread of information that is either intentionally or unintentionally misleading or provocative with serious consequences.
Another global trend given detailed consideration in the report is the spread of antibiotic-resistant bacteria. The numbers of lives now being lost due to antibiotic-resistant infections may be miniscule in comparison with big killers like heart disease and cancer, but the prospect of a world in which antibiotics are progressively rendered ineffective for treating even common infections is clearly alarming. On top of destabilising our health systems there are profound cost implications for economic systems and for the stability of social systems. The report highlights the comment by Dr Margaret Chan, Director-General, World Health Organisation that ‘a post- antibiotic era means, in effect, an end to modern medicine as we know it. Things as common as strep throat or a child’s scratched knee could once again kill’.
The Global Risks report is a useful resource for boards, not only in terms of identifying the external threats shaping the future of businesses around the world, but also for its recommendations on building resilience in the face of these threats.
This year’s report includes a ‘Special Report’ section, which attempts to initiate a national resilience measurement with regard to global risks. It explores the use of qualitative and quantitative indicators to assess overall national resilience to global risks by looking at five national-level subsystems (economic, environmental, governance, infrastructure and social) through the lens of five components: robustness, redundancy, resourcefulness, response and recovery. ‘The aim is to develop a new diagnostic report to enable decision-makers to track progress in building national resilience and possibly identify where further investments are needed,’ the report states.
The development of these metrics is in its early stages, says Lee Howell in his article, however he expresses the hope that that this diagnostic tool can become an ‘MRI’ for national decision-makers to assess their countries’ resilience to global risks. ‘By revealing underlying weaknesses that more traditional risk-assessment methods may miss, we could pinpoint the structural reforms, behavioural changes, and strategic investments that increased resilience requires,’ he writes.
The World Economic Forum’s Global Risks 2013 report is the flagship research publication of the World Economic Forum’s Risk Response Network. Further information can be found at www.weforum.org/risk
Lee Howell’s article is available on the Project Syndicate website: www.project-syndicate.org.
The evolving risk landscape: